Powering China's Gigawatt Growth

09/01/2009 11:00 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

Dongfang Electric will prosper from the power-plant building spree ordered by the government, writes Yiannis G. Mostrous in Silk Road Investor.

China already ranks second in the world in terms of installed power generation capacity and is the world's largest market for power generation equipment.

Despite these impressive statistics, the Chinese market is far from mature. The country's economy continues to grow at a robust rate, while the power-hungry process of industrialization and urbanization is still in its early stages; the nation's demand for electricity will only increase, heightening the need for additional power generation capacity. Building sufficient capacity to meet demand will take some time.

China's installed capacity grew by a cumulative average of 10% over last 12 years. According to industry estimates, power generation capacity will grow 6% per year between now and 2020. Meanwhile, the US Energy Information Administration (EIA) expects China to expand its power capacity at the fastest rate in the world until 2030.

Dongfang Electric (Hong Kong: 1072) manufactures equipment for large thermal-power, hydro-power, and nuclear-power stations. It's one of the three major power-generation equipment makers in China. The company currently has a production capacity of 30 gigawatts per year and controls 30% of the domestic market for large-scale steam/hydro power equipment.

Although thermal-related orders still dominate its books, growth will be come from cleaner forms of energy—especially nuclear and wind power.

The company's thermal business should also experience a modicum of growth, as the government has been pushing for bigger and more efficient coal-fired units. This plan calls for the closure of smaller, inefficient units that produce more pollutants in favor of modern power generation facilities.

If the state's projections and plans materialize, China will need to add around 60 to 70 gigawatts of new nuclear capacity over the next decade—and many analysts believe this estimate is on the low end of the range. With nuclear power accounting for little over nine megawatts of total capacity, there's plenty of growth opportunity.

Dongfang Electric should also benefit handsomely from its exposure to the nuclear energy sector. Nuclear power equipment represents the company's second-largest business line, and these orders could generate more than 20% of the firm's revenues in the next two to three years.

Prospective investors should note that government-related enterprises control 95% of installed power capacity in China; that level of government involvement ensures that equipment demand will remain strong. Case in point: In the first five months of 2009, the big three power equipment manufacturers signed new orders worth $8 billion.

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